All Forum Posts by: Tom Lafferty

actually the two people that seemed most confused were attorneys at these firms.  

I totally agree with getting out of retirement accounts.  It's taken me a long time to come to that conclusion, but I'm there.  It's not really for tax reasons either.  RE will not be tax free for me, although I know it has huge benefits outside of a retirement acct.  it's solely so I have complete freedom to use my funds in my own deals that I have a much larger amount of control over.  I will not be using 1031's, so will have to recapture depreciation anyway.  I have seriously debated taking the hit with penalties and tax to get out of all my retirement accounts, but when adding it to W2 income the hit is huge.  Can't do it!  I'm only 1-3 yrs from retiring from my FD job, so it only makes sense to wait until there is no W2.  

Ok thanks. I was specifically talking about leveraged real estate, so thanks for clarifying. One topic that still creates confusion is the non-recourse issue. I know an IRA can use leverage only if its non-recourse, but in the case of a passive investor buying into a partnership that owns an apartment complex that was purchased using full recourse debt, there is no recourse to the IRA that is investing in the deal because the IRA did not sign the loan. The IRA (or solo k) is strictly buying share of an LLC that owns a property, and other people are guaranteeing the debt. When I pointed that out, a few of the companies clearly became confused, and admitted they hadn't come across that?! It happens ALL the time! I sure hope its not a prohibited transaction!

We just purchased a 78 unit property in the DFW area that had horrible management, tons of deferred maintenance, and 25 vacant units..... hope I don't regret it!  Thought it might be interesting to those looking at multifamily??

Here are a few details:

-20 investors w/$25k-$100k each

-Purchase price: xxxxxxx (removed in case appraisal district starts snooping around!) Taxable value right now is about $2,300,000

-Loan: Full recourse 75% LTV (including 75% of $450,000 rehab budget), 5 yr term, 25 year amortization, 4.5% interest with interest only year 1

-Age: 1968

-Individual HVAC and Hot water heaters

-9 down units have been "down" since 2007!!

-Professional management w/1 full time manager and 1 full time maintenance tech

-Plan:  Full exterior rehab, renovate all down/vacant units, move office from TWO units that are currently being used to the abandoned dedicated office that is down to the studs.  After a year to 18 months, we'll look at a sale if the market is still crazy, or also consider a refi into fannie/freddie debt.   

Most challenging deal I've encountered due to having virtually NO records from seller; so please don't ask what the cap rate was!  Just know that it would be horrendously low based on actual numbers.

You can also use your IRA/solo k to invest in someone else's deal, as long as you are not personally running the deal, or being paid as a sponsor. I have a solo 401k set up through @Mark Nolan, and we invest in apartment complexes as totally passive investors.  I also sponsor multifamily deals myself, where I accept money from other people's IRA's and solo 401k's, but I CANNOT use my own solo k funds for those deals because I will personally benefit from them, and am involved in the management of those investments.  

Hopefully Mark can confirm this, but another benefit of the solo k over the SDIRA is that the solo k is NOT subject to UBIT/UDFI tax, whereas the SDIRA is subject to it.  

It is a very confusing topic, and I interviewed four providers before going with Mark Nolan.  The only reason is that even though they worked at companies providing SDIRA's and Solo K's, they STILL seemed confused on what you could and couldn't do with real estate.  Mark seemed to have a much better grasp.  Just know that if you get an answer from someone that is supposed to be knowledgeable about the subject, it won't hurt to get a second opinion!

80% agency debt is not unusual at all if it's not in a fnma pre-review area. You do need experience though to get that. We get 80% including rehab in the DFW area, and just for comparison, fnma would only go to around 70% on a deal in Tulsa recently. Freddie was fine with 80%, but the small balance program doesn't provide financing on the rehab so its out of pocket, effectively lowering your LTV.

We closed on a 78 unit property last week, and got a 75% LTV loan through @James Eng that was 4.5%, only a 1% early refi penalty, and NO prepay penalty if we were to sell.  This included 75% of a $5700/dr rehab budget.  The deal wouldn't qualify for agency debt due to very low occupancy and heavy rehab needed, so James got us a great bank loan.  We barely even had financials so it's pretty impressive that James was able to pull that off.  The lending is definitely out there if you can put the right sponsorship group together.  

Forgot to add......  If you are talking about only $800 to gain $100 that is not even worth a seconds hesitation.  I spend $3000-$4000 to upgrade a unit to get $50-$100 in rent!!  Thats new flooring, two tone paint, new lighting and plumbing fixtures, and these are C class properties.  Its being done all over the place.  $800 is nothing.  See if other properties in the area are doing even more, and see if you can get even more rent with additional improvements.  Obviously you don't want to go crazy, but definitely worth a half a day to go visit and talk with the comps

Absolutely agree with most that are recommending exterior first, then upgrading interiors, possibly replacing the PM.  He sounds like a poor fit for your goals, but if he's willing to change, then great.  The problem is that if he is not on board, that is likely to come across to potential customers.  You absolutely want the person leasing your units to be excited about them, and selling the upgrades.  This person can make all the difference in the world.  If he's been doing it 50 years, its going to be tough to completely change his mindset.  We see things like this all the time, and people always ask why we think we can do things that the current owner isn't doing.  I am a key principal and investor in an apartment complex purchased a few month ago, and rents were increased $125 day one without ANY renovations.  I attended a networking event at the property yesterday, and the number one question was, "Why wasn't the previous owner doing this?"  Because he didn't know any better and had poor management!!  

On 11 units, your options may be limited as far as management goes, but if the comps support doing upgrades and increasing rents, DO IT!!!  I also think rebranding is a great idea.  Depends on the reputation of the property, and how much you're going to change it, but its not hard or expensive.  If you're truly on the edge of an area thats better than yours, maybe you can dramatically improve the reputation and image, therefore getting better tenants.  Good Luck, hope you crush it!

@Hubert Washington you can buy a smaller deal without having to do the day to day stuff, you'll just need to hire part time maintenance and leasing people.  This is still more work than an 80+ unit deal, as it it tough to make a deal work well with professional management on properties that small.  I self managed a 32 unit with a PT leasing person and PT maintenance guy that ran about $!10-15k/yr each.  This allowed me to continue working on other deals and my other career as well.  

There are definitely situations that require your time and attention, and you have to deal with managing them, but I wouldn't call it a full time job.  Joel Owens is right though, if you are doing the day to day stuff, it absolutely will be.  

Hmmm, good to know.  That's been the big debate the last few years; sheet vs plank.  Most of the operators I've asked prefer the plank due to longer wear and MUCH easier/better repairs.  One company told me the sheet stuff has gotten better, and that they supposedly could repair the tears that WILL happen.  Then they admitted that it never really looks right.  If someone can repair it though, the same companies doing planks for $1.60 will do sheet for .99/ft installed

@Mike Dymski I'm not purchasing it directly, it's through a couple of vendors who are also installing it.  A lot of the property management companies here are importing it directly from China.  I'm not sure what it's called, as they even have their own packaging.  $1.60/ft installed is what we've paid from 2 or 3 different contractors.  Just make sure you ask about the wear layer, as it can vary greatly.  This is a very thin product; not nearly as thick as allure, but works well if the surface is prepped correctly.